Accelerating the sustainability shift with Sustainability Linked Loans

“When discussing sustainability, some of the Bank’s corporate clients diligently put the question back to us,” says Serge Manusov of ABN AMRO Loan Markets Origination, a team within Corporate & Institutional Banking that coordinates international syndicated loans*. “‘How sustainable are you as a firm?’ they ask. To be honest, I think that’s a fair question. After all, it’s all about jointly making progress in this area, together with our clients.”

Monitoring developments

Unlike the more familiar ‘Green Loans’, which are loans specifically linked to investments in sustainable assets, Sustainability Linked Loans are linked to the fulfilment of sustainable objectives. 

This particular ‘use-of-proceeds’ condition does not apply to SLLs, however. Serge continues: “It’s important to remember that sustainability isn’t just a one-off exercise – it’s an ongoing process. SLLs help companies develop, measure and monitor sustainability performance on a continuous basis.”

Spectacular growth

Since SLLs focus on objectives rather than specific investments, they offer yet another advantage: any credit facility (whether loan, revolving credit, lease or guarantee facility) should be eligible if you link it to sustainable objectives, so there is no requirement for ‘new money’ sustainable investments. And that’s exactly why SLLs have rapidly gained popularity since their creation in 2017. In 2019, global SSL issuance amounted to approximately USD 135 billion, out of USD 166 billion for syndicated Green Loans and SLLs collectively. In 2018, this was just USD 47 billion out of a total of USD 69 billion and in 2017, just a “meagre” USD 2.5 billion. Despite the coronavirus crisis, SLLs have already accounted for a staggering USD 52.5 billion in 2020 year to date until 19 June 2020 (source: Refinitiv, IFR ESG Financing Data Briefing, 19 June 2020). It’s clear that SLL volumes are growing exponentially and indeed at faster pace vis-à-vis Green Loans. A special feature of SLLs is that interest rate margins are tied to ambitious sustainable performance objectives, normally set over the life of the facility and then measured annually. A margin discount may be applicable in case objectives are met; accordingly, a margin premium may apply if objectives are not met. “Due to the link to sustainable performance, SLLs fit well with ABN AMRO’s strategy to help clients make a transition to a sustainable business model,” Serge adds.

Not about the money

Although these discounts and penalties may well yield (or cost) quite a bit for large-sized loans in absolute terms, the impact on the applicable interest rate is relatively modest. “When a client opts for a SLL, it’s not just about the interest rate reduction,” Serge emphasises. “It’s about us moving the business towards greater sustainability jointly with the client. Also, by adopting an SLL, the client is making a strong statement on sustainability to its staff, suppliers and investors”.

There’s enormous potential for SLLs as any existing loan can theoretically be ‘converted’ to a SLL. To that end, ABN AMRO is heavily involved in developing relevant objectives for its clients that may be linked to these loans. In most cases, these are three to five measurable KPIs. “Examples of potential objectives include carbon reduction or making a particular piece of real estate climate-neutral. But you could also decide to focus on the supply chain and implement a responsible purchasing policy. As long as the objectives are relevant to the specific business and sector, whilst also being meaningful, measurable and verifiable.”

Sustainability Linked Loan Principles

The Sustainability Linked Loan Principles (SLLPs) play a key role in determining the actual sustainable objectives in a SLL. As a member of the working group within the Loan Markets Association, ABN AMRO has been playing an active role in developing this framework. The SLLPs reference the United Nations’ Sustainable Development Goals, but also new EU definitions of sustainability.

From oil to gas?

In “being green”, there’s a certain temptation, even for ABN AMRO, to focus mainly on sectors and companies that are already well underway in terms of sustainability, Serge admits. However, the greatest impact could be to support the transition story of less green clients. Indeed, if the aim is to speed up the transition, one way to make that happen at a global scale could, for example, be to concentrate on businesses that are switching from oil to gas. We plan to take on every challenge, looking beyond the most obvious sectors in order to achieve our sustainability objectives.”

Serge concludes, “We do not want to engage in any greenwashing. As an example, a multinational looking to expand its electrical fleet from ten to thirty cars in two years’ time, that’s obviously not an ambitious plan given the size of the company. However, that same objective might be a good fit for an SME client. Our SLL financing initiatives must make a real contribution to the transition. The days when it was ‘hip and happening’ to go green are gone. Sustainability is gradually moving from an ambition to a condition.

*Bank facilities provided to corporate borrowers, in which multiple banks act as a joint lenders on common terms within a single credit agreement.